How to stay financially prepared for a job loss

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Photo: Billy Bob Bain (via Flickr)

Economic cycles have become an irreversible part of our lives. Job losses have become all too common in today’s world. Gone are the days when one joined a company and was assured of a job till superannuation. The opening up of the economy in the year 1991 brought in its wake economic opportunities as well as its fair share of pitfalls.

Namma Ooru Bengaluru, has been one of the biggest beneficiaries of economic liberalization. Not surprisingly, it has also borne the brunt in fair measure. Bangalore today houses a number of industries where job losses and contract jobs are de rigueur. So, what does one do during a job loss and how could one factor it in, even when times are good?

The biggest challenge that one faces during a job loss is psychological. The psychological challenge would be best dealt with by clinical psychologists, counsellors and psychiatrists. Let us, however, deal with the financial aspect of job loss and how to plan for it when times are good.

Financial planning basically deals with the five pillars of superannuation or retirement fund, life insurance, taxation, liquidity and health insurance. It is important for one to allocate a portion of their savings towards each of these aspects.

The only time of the year when financial planning is taken seriously is at the end of the financial year. But this exercise should be undertaken not just with a view to minimizing the tax burden, but also to hedge for exigencies that might arise in one’s life. Adhering to a few basic principles could go a long way in maintaining financial security.

Know your goals

Like it or not, we live in a material world and all of us have some material desires. Compartmentalizing goals into short term, medium term and long term goals helps. Just as a corporate entity has operational, tactical and strategic goals, a person could have long term, medium term and long term goals. The goals, of course, differ from person to person.

Investments ought to be made with these goals in mind. Saving up for an overseas vacation could be classified as a short term goal, buying a car could be a medium term goal, saving up for the down payment of a dream home a long term goal.

The proportion of investment in long term, short term and medium term investments is dependent on a number of factors such as the investor’s risk appetite, short term and long term needs, the age of the investor, taxation, liquidity, superannuation needs etc. A young person could invest more on long term options given that he has a long life ahead. His investment in stocks could be higher when compared to an older person given his risk appetite. An older person has more liquidity needs and needs to be risk averse given his commitments. In short, any investment strategy needs to be customized.

It might also be a good idea to apportion a certain sum of money towards traditional instruments such as FD or RD. One could use these funds to invest in short term, medium term or long term options in the event of a job loss.

A follow up article to this will look at the various instruments of differing terms available for us to investment in.

Never over-leverage

Credit seems to have suddenly become a cool word in our times. Banks today offer easy loans. It is very tempting to go for a loan in order to fulfil your desires, but hold on! All this comes at a cost.

Typically, an average individual spends about 20 to 25% of his salary on housing. It would be a good idea to apply the thumb rule of the EMI not exceeding 33% of one’s monthly salary, even when one decides to take a loan.

Not just with respect to housing credit, it generally makes sense to live within one’s limits and means so as to be able to save for a rainy day. Let us minimize the use of the credit card. It really helps when the sun isn’t shining as brightly.

Health Insurance – An ignored aspect of financial planning

The Indian society by and large seems to have a negative view of insurance. Insurance is a financial cover against a contingency. It is used to hedge against loss of life or illness.

The lack of a good public health care system has often meant that families in India end up spending a fortune on ailments. There are a few examples of good public health care systems such as Jayadeva and Nimhans in Bangalore but again they are few and far between. To be frank, no amount of health cover is sufficient.

I have seen a lot of my friends go through major financial crises in the event of medical emergencies in their family. They have depended on credit cards and personal loans to have their near and dear ones treated. God forbid, but should someone in the family fall ill while one is between jobs, a good health policy could provide substantial stress relief.

Plan for marriage

It is important to plan for your life’s most important event, particularly since it involves a lifelong commitment. Financial stress could affect one’s married life as well. A job loss coupled with financial stress and a strained relationship with your spouse is the last thing that one wants.

It is not a bad idea to speak about money when one is dating or during the courtship period; it is in fact advisable to lay out a plan which would be mutually beneficial for both partners and help them take on major challenges that might come up unforeseen in the course of life.

Find a second source of income

A job is not a guarantee of a lifelong source of income. Find a passion, an interest which could double up as a second source of income. It could help you sustain yourself in the event of a job loss.

Lastly, remember that losing your job is not the end of the world. It pays to have a positive attitude and look forward to the future. Every problem that presents itself before us is an opportunity in itself. Maybe, there is a hidden entrepreneur in all of us and the loss might act as a catalyst to unleash that hidden self.

KFC would not have gone onto become a $23-billion enterprise had Colonel Sanders committed suicide as planned upon receiving $105 from the US Government after his retirement. Instead, he borrowed $87 against his cheque and went door to door selling chicken. In the process, he became a billionaire.

A job loss might eventually turn out to be a blessing in disguise. It might help one develop a new skill or engage in some introspection that enables him to emerge as a better, stronger person.